A Physician’s Guide to Financial Management Basics

By Laura Ramos Hegwer

Translating the bedside impact of
business decisions requires a basic understanding of key financial management
concepts and the ability to navigate an income statement.

Physicians want to direct funds to “what’s best for patients,” but not all investments in patient care result in an ROI. Physicians thus need to understand the basics of finance so they can thoughtfully contribute to these discussions at the practice, department, and organizational levels, says Richard Priore, president
and CEO, Excelsior HealthCare Group.

Yet physicians frequently are at a disadvantage in discussions with financial and operational leaders. “Physicians often aren’t given the knowledge, tools, or resources to be good stewards of increasingly scarce resources,” Priore says. “But as the industry moves from volume to value, physicians understand that they
need to know how to participate meaningfully in their meetings with administrators.”

Physician voices are especially needed to help guide strategic investments. “For every dollar that a physician leader can spend, there are multiple dollars of need,” Priore says. “One of physicians’ greatest organizational leadership responsibilities is allocating those dollars to the greater good. The need to
balance the seesaw of quality and cost exists whether it’s your first day of practice or you’re 20 years into your career and you’re CEO of a large system.”

Measuring Financial Performance

When physicians first take a leadership role, they may struggle to navigate financial reports such as income statements, which show profitability from the flow of revenues and expenses over a period (usually a month). Yet physician leaders need to be able to interpret
these reports so they can conduct a financial forensic analysis to gauge the performance of their practice, department, or organization.

Understanding how measures like total asset turnover and cost per discharge are defined also can help them converse with finance leaders and gain a better knowledge of how their balance sheet measures up against industry benchmarks (see an
exhibit on using benchmarks to gauge the financial health of an organization).

At the department level, physicians may benefit from using a financial algorithm that mimics how they make clinical decisions, such as when assessing a patient’s lab values. When physician leaders conduct their monthly operations review, Priore recommends using a financial pathway as a tool for determining which
steps to take if they identify specific variances in their operating revenue or operating expenses (see the exhibit below for an example).

Making a Business Case

Beyond reading and reacting to an income statement, knowing how to make a business case is another tenet of financial management. For physician leaders, articulating a tangible financial benefit of an initiative, instrument, or other investment can be particularly challenging if their financial acumen is limited, Priore
says. An even more difficult scenario entails suggesting such capital allocations when the organization has a moratorium on funding quality improvement initiatives that do not have a positive ROI.

Even the organizational culture can present barriers when making a business case. “The prevailing policies, politics, and personalities in any organization may be difficult for the physician to navigate,” Priore says. That’s why it helps to have a game plan.

When proposing enhancements to services or staffing, physicians should develop a financial pro forma. Take the case of a medical director in an emergency department who wants to combat blood culture contamination, which is causing unnecessary patient morbidity and driving up
healthcare costs. After reading in a journal article that cross-contamination rates are significantly higher in blood draws by nurses than in draws by phlebotomists, the medical director wants to assess the ROI of hiring dedicated phlebotomists to conduct blood draws. By comparing the contamination rates of nurses
and phlebotomists, and determining the unreimbursed cost per contamination, the medical director can assess the potential savings. From there, the director can determine the incremental operating expense of hiring more phlebotomist FTEs and the ideal number that would produce a positive ROI.

When calculating the financial ROI of an initiative, another key concept is net present value (NPV), which represents the sum of the present values of a project’s net cash flows discounted at the cost of capital. Understanding NPV helps physician leaders assess how a $1
return today stacks up against the same $1 at a future date, Priore says.

While financial analysts often can help crunch these “what if” numbers, physician leaders at every level should understand how to best make their case, Priore says. “Demonstrating ROI can be challenging, but it is best for physician leaders to be conservative in their estimation of results,” he notes.
Overpromising financial gains can compromise a physician leader’s credibility with the C-suite.

Expert Advice

“You don’t need an advanced degree to improve your financial knowledge,” Priore says. He offers the following suggestions for physicians seeking to improve their business acumen.

Know the vocabulary. Having a basic understanding of key terms and concepts can help physicians feel more comfortable conversing with their peers in finance and operations. (See the accompanying glossary:
Select Healthcare Financial Management Terms)

Advocate on behalf of
your colleagues for meaningful data.Physicians drive healthcare costs through their selection of supplies and equipment as well as their orders for medications, tests, and specialty consults. A clinician’s documentation in the electronic health record also has
a significant effect on DRG assignment and the case mix index, which are key drivers of payment.

Many physicians recognize this impact and want to be better stewards of resources. “Often, the biggest challenge for physicians is that they don’t have access to accurate, actionable data,” Priore says. A 2017
article in JAMA Surgery found that giving surgeons a scorecard helped decrease surgical supply costs. At a minimum, all physicians should press their organizations for their risk-adjusted cost per case and their quality outcomes, compared with their peers, Priore says.

Look for
opportunities for experiential learning and mentorship. “Physicians benefit from being able to apply their knowledge,” Priore says. One viable scenario is to work in a dyad leadership model that pairs each physician leader with an executive from
finance or operations who has a complementary skill set.

Even if physicians are not in a formal dyad structure, they should seek the insight of finance leaders on topics related to specified organizational goals, such as meeting budgeted revenue and expense targets.

Although physicians are often expected to be all-knowing, there is no shame in seeking out a mentor, Priore says. He suggests choosing an administrator or another physician with strong financial acumen to help review and understand financial reports.

Be inquisitive during
meetings. Priore says the following questions can help physicians demonstrate their credibility and learn more about the organization’s performance:

How is overhead calculated and allocated?

What is our cost of capital?

What is our payer mix?

What is our contribution margin (i.e., profit) on a particular procedure or service?

What is our plan to grow profitable volume?

Bridging the Divide

Armed with better financial knowledge, physicians can become what Priore calls “boundary spanners” who help other clinicians improve their business skills. For example, they can help their peers better understand how their documentation practices affect the organization’s case mix index and, ultimately,
its revenues. They also can help explain how unwarranted practice variation mars clinical and financial outcomes, and work to improve the overall performance of the organization.

At the same time, they can offer administrators insights on how physicians approach financial situations through a clinical lens. “Physicians can help administrators understand the balancing act they face in reconciling cost and quality,” Priore says. Specifically, they can translate the bedside impact of
various financial decisions, such as adjusting labor or updating outmoded, inefficient equipment.

“Physicians have an obligation to help administrators make effective, informed decisions about the practice, department, or health system,” Priore says. “In addition to enabling a more productive dialogue with administrators, physicians’ broader understanding and knowledge of the financial inner workings of a hospital or
practice serve to continuously improve clinical outcomes.”

Translating the bedside impact of
business decisions requires a basic understanding of key financial management
concepts and the ability to navigate an income statement.

Physicians want to direct funds to “what’s best for patients,” but not all investments in patient care result in an ROI. Physicians thus need to understand the basics of finance so they can thoughtfully contribute to these discussions at the practice, department, and organizational levels, says Richard Priore, president
and CEO, Excelsior HealthCare Group.

Yet physicians frequently are at a disadvantage in discussions with financial and operational leaders. “Physicians often aren’t given the knowledge, tools, or resources to be good stewards of increasingly scarce resources,” Priore says. “But as the industry moves from volume to value, physicians understand that they
need to know how to participate meaningfully in their meetings with administrators.”

Physician voices are especially needed to help guide strategic investments. “For every dollar that a physician leader can spend, there are multiple dollars of need,” Priore says. “One of physicians’ greatest organizational leadership responsibilities is allocating those dollars to the greater good. The need to
balance the seesaw of quality and cost exists whether it’s your first day of practice or you’re 20 years into your career and you’re CEO of a large system.”

Measuring Financial Performance

When physicians first take a leadership role, they may struggle to navigate financial reports such as income statements, which show profitability from the flow of revenues and expenses over a period (usually a month). Yet physician leaders need to be able to interpret
these reports so they can conduct a financial forensic analysis to gauge the performance of their practice, department, or organization.

Understanding how measures like total asset turnover and cost per discharge are defined also can help them converse with finance leaders and gain a better knowledge of how their balance sheet measures up against industry benchmarks (see an
exhibit on using benchmarks to gauge the financial health of an organization).

At the department level, physicians may benefit from using a financial algorithm that mimics how they make clinical decisions, such as when assessing a patient’s lab values. When physician leaders conduct their monthly operations review, Priore recommends using a financial pathway as a tool for determining which
steps to take if they identify specific variances in their operating revenue or operating expenses (see the exhibit below for an example).

Making a Business Case

Beyond reading and reacting to an income statement, knowing how to make a business case is another tenet of financial management. For physician leaders, articulating a tangible financial benefit of an initiative, instrument, or other investment can be particularly challenging if their financial acumen is limited, Priore
says. An even more difficult scenario entails suggesting such capital allocations when the organization has a moratorium on funding quality improvement initiatives that do not have a positive ROI.

Even the organizational culture can present barriers when making a business case. “The prevailing policies, politics, and personalities in any organization may be difficult for the physician to navigate,” Priore says. That’s why it helps to have a game plan.

When proposing enhancements to services or staffing, physicians should develop a financial pro forma. Take the case of a medical director in an emergency department who wants to combat blood culture contamination, which is causing unnecessary patient morbidity and driving up
healthcare costs. After reading in a journal article that cross-contamination rates are significantly higher in blood draws by nurses than in draws by phlebotomists, the medical director wants to assess the ROI of hiring dedicated phlebotomists to conduct blood draws. By comparing the contamination rates of nurses
and phlebotomists, and determining the unreimbursed cost per contamination, the medical director can assess the potential savings. From there, the director can determine the incremental operating expense of hiring more phlebotomist FTEs and the ideal number that would produce a positive ROI.

When calculating the financial ROI of an initiative, another key concept is net present value (NPV), which represents the sum of the present values of a project’s net cash flows discounted at the cost of capital. Understanding NPV helps physician leaders assess how a $1
return today stacks up against the same $1 at a future date, Priore says.

While financial analysts often can help crunch these “what if” numbers, physician leaders at every level should understand how to best make their case, Priore says. “Demonstrating ROI can be challenging, but it is best for physician leaders to be conservative in their estimation of results,” he notes.
Overpromising financial gains can compromise a physician leader’s credibility with the C-suite.

Expert Advice

“You don’t need an advanced degree to improve your financial knowledge,” Priore says. He offers the following suggestions for physicians seeking to improve their business acumen.

Know the vocabulary. Having a basic understanding of key terms and concepts can help physicians feel more comfortable conversing with their peers in finance and operations. (See the accompanying glossary:
Select Healthcare Financial Management Terms)

Advocate on behalf of
your colleagues for meaningful data.Physicians drive healthcare costs through their selection of supplies and equipment as well as their orders for medications, tests, and specialty consults. A clinician’s documentation in the electronic health record also has
a significant effect on DRG assignment and the case mix index, which are key drivers of payment.

Many physicians recognize this impact and want to be better stewards of resources. “Often, the biggest challenge for physicians is that they don’t have access to accurate, actionable data,” Priore says. A 2017
article in JAMA Surgery found that giving surgeons a scorecard helped decrease surgical supply costs. At a minimum, all physicians should press their organizations for their risk-adjusted cost per case and their quality outcomes, compared with their peers, Priore says.

Look for
opportunities for experiential learning and mentorship. “Physicians benefit from being able to apply their knowledge,” Priore says. One viable scenario is to work in a dyad leadership model that pairs each physician leader with an executive from
finance or operations who has a complementary skill set.

Even if physicians are not in a formal dyad structure, they should seek the insight of finance leaders on topics related to specified organizational goals, such as meeting budgeted revenue and expense targets.

Although physicians are often expected to be all-knowing, there is no shame in seeking out a mentor, Priore says. He suggests choosing an administrator or another physician with strong financial acumen to help review and understand financial reports.

Be inquisitive during
meetings. Priore says the following questions can help physicians demonstrate their credibility and learn more about the organization’s performance:

How is overhead calculated and allocated?

What is our cost of capital?

What is our payer mix?

What is our contribution margin (i.e., profit) on a particular procedure or service?

What is our plan to grow profitable volume?

Bridging the Divide

Armed with better financial knowledge, physicians can become what Priore calls “boundary spanners” who help other clinicians improve their business skills. For example, they can help their peers better understand how their documentation practices affect the organization’s case mix index and, ultimately,
its revenues. They also can help explain how unwarranted practice variation mars clinical and financial outcomes, and work to improve the overall performance of the organization.

At the same time, they can offer administrators insights on how physicians approach financial situations through a clinical lens. “Physicians can help administrators understand the balancing act they face in reconciling cost and quality,” Priore says. Specifically, they can translate the bedside impact of
various financial decisions, such as adjusting labor or updating outmoded, inefficient equipment.

“Physicians have an obligation to help administrators make effective, informed decisions about the practice, department, or health system,” Priore says. “In addition to enabling a more productive dialogue with administrators, physicians’ broader understanding and knowledge of the financial inner workings of a hospital or
practice serve to continuously improve clinical outcomes.”

HFMA RESOURCE LIBRARY

Patient financial engagement is more challenging than ever – and more critical. With patient responsibility as a percentage of revenue on the rise, providers have seen their billing-related costs and accounts receivable levels increase. If increasing collection yield and reducing costs are a priority for your organization, the metrics outlined in this presentation will provide the framework you need to understand what’s working and what’s not, in order to guide your overall patient financial engagement initiatives and optimize results.

No two patients are the same. Each has a very personal healthcare experience, and each has distinct financial needs and preferences that have an impact on how, when and if they chose to pay their healthcare bill. It’s no longer effective to apply static billing techniques to solve the complex challenge of collecting balances from patients. The need to tailor financial conversations and payment options to individual needs and preferences is critical. This presentation provides 10 recommendations that will not only help you improve payment performance through a more tailored approach, but take control of rising collection costs.

This white paper, written by Apex Vice President of Solutions and Services, Carrie Romandine, discusses the importance of patient segmentation and messaging specifically related to the patient revenue cycle. Applying strategic messaging that is tailored to each patient type will not only better educate consumers on payment options specific to their billing needs, but it will maximize the amount collected before sending to collections. Further, targeted messaging should be applied across all points of patient interaction (i.e. point of service, customer service, patient statements) and analyzed regularly for maximized results.

This white paper, written by Apex President Patrick Maurer, discusses methods to increase patient adoption of online payments. Providers are now seeking ways to incrementally collect more payments due from patients as well as speeding up the rate of collections. This white paper shows why patient-centric approaches to online payment portals are important complements to traditional provider-centric approaches.

Increased electronic engagement between healthcare providers and patients provides significant opportunities for improving revenue cycle metrics and encouraging patients to access EHRs. This article, written by Apex Founder and CEO Brian Kueppers, explores a number of strategies to create synergy between patient billing, online payment portals and electronic health record (EHR) software to realize a high ROI in speed to payment, patient satisfaction and portal adoption for meaningful use.

Faced with a rising tide of bad debt, a large Southeastern healthcare system was seeing a sharp decline in net patient revenues. The need to improve collections was dire. By integrating critical tools and processes, the health system was able to increase online payments and improve its financial position. Taking a holistic approach increased overall collection yield by 10% while costs came down because the number of statements sent to patients fell by 10%, which equated to a $1.3M annualized improvement in patient cash over a six-month period. This case study explains how.

To maintain fiscal fitness and boost patient satisfaction and loyalty, healthcare providers need visibility into when and how much they will be paid–by whom–and the ability to better navigate obstacles to payment. They need payment clarity. This whitepaper illuminates this concept that is winning fans at forward-thinking hospitals.

Financial services staff are always looking for ways to improve the verification, billing and collections processes, and Munson Healthcare is no different. Read about how they streamlined the billing process to produce cleaner bills on the front end and helped financial services staff collect more than $1 million in additional upfront annual revenue in one year.

Effective revenue cycle management can be a challenge for any hospital, but for smaller providers it is even tougher. Read how Wallace Thomson identified unreimbursed procedures, streamlined claims management, and improved its ability to determine charity eligibility.

Before launching an energy-efficiency initiative, it’s important to build a solid business case and understand the funding options and potential incentives that are available. Healthcare leaders should consider taking the steps outlined in the whitepaper to ease the process of gaining approval, piloting, implementing, and supporting sustainability projects. You will find that investing in sustainability and energy efficiency helps hospitals add cash to their bottom line. Discover how hospitals and health systems have various options for funding energy-efficient and renewable-energy initiatives, depending on their current financial structure and strategy.

Health care is a dynamic mergers and acquisitions market with numerous hospitals and health systems contemplating or pursuing formal arrangements with other entities. These relationships often pose a strategic benefit, such as enhancing competencies across the continuum, facilitating economies of scale, or giving the participants a competitive advantage in a crowded market. Underpinning any profitable acquisition is a robust capital planning strategy that ensures an organization reserves sufficient funds and efficiently onboards partners that advance the enterprise mission and values.

The success of healthcare mergers, acquisitions, and other affiliations is predicated in part on available capital, and the need for and sources of funding are considerations present throughout the partnering process, from choosing a partner to evaluating an arrangement’s capital needs to selecting an integration model to finding the right money source to finance the deal. This whitepaper offers several strategies that health system leaders have used to assess and manage capital needs for their growing networks.

Announcements from several commercial payers and the Centers for Medicare and Medicaid Services (CMS) early in 2015 around increased efforts to form value-based contracts with providers seemed to point to an impending rise in risk-based contracting. Rather than wait for disruption from the outside in, health care providers are now making inroads on collaborating with payers on various risk-based contracting models to increase the value of health care from within.

Yuma Regional Medical Center (YRMC) is a not-for-profit hospital serving a population of roughly 200,000 in Yuma and the surrounding communities.
Before becoming a ZirMed client, Yuma was attempting to manually monitor hundreds of thousands of charges which led to significant charge capture leakage. Learn how Yuma & ZirMed worked together to address underlying collections issues at the front end, thus increasing Yuma’s overall bottom line.

Kindred Hospital Rehabilitation Services works with partners to audit the market and the facility’s role in that market to identify opportunities for improvement. This approach leads to successes; Kindred’s clinical rehab and management expertise complements our partners’ strengths. Every facility and challenge is unique, and requires a full objective analysis.

Qualified coders are getting harder to come by, and even the most seasoned professional can struggle with the complexity of ICD-10. This 5-Minute White Paper Briefing explains how partnerships can help improve coding and other key RCM operations potentially at a cost savings.

The point of managing your revenue cycle isn’t just to improve revenue and cash flow. It’s to do those things effectively by consistently following best practices— while spending as little time, money, and energy on them as possible.

The reasons claims are denied are so varied that managing denials can feel like chasing a thousand different tails. This situation is not surprising given that a hypothetical denial rate of just 5 percent translates to tens of thousands of denied claims per year for large hospitals—where real‐world denial rates often range from 12 to 22 percent. Read about how predictive modeling can detect meaningful correlations across claims denials data.

Emergency Mobile Health Care (EMHC) was founded to be and remains an exclusively locally owned and operated emergency medical service organization; today EMHC serves a population of more than a million people in and around Memphis, answering 75,000 calls each year.

Since the Physician Quality Reporting Initiative (PQRI) introduction, CMS has paid more than $100 million in bonus payments to participants. However, these bonuses ended in 2015; providers who successfully meet the reporting requirements in 2016 will avoid the 2% negative payment adjustment in 2018, so now is the time to act! Included in this whitepaper are implications of increasing patient responsibility, collections best practices, and collections and internal control solutions.

Getting paid what your physician deserves—that’s the goal of every biller. Yet even for the best billers, achieving that success can be elusive when denials stand in the way of success, presenting challenges at every turn. Denials aren’t going away, but you can learn techniques to manage and even prevent them.Join practice management expert Elizabeth W. Woodcock, MBA, FACMPE, CPC, to: Discover methods to translate denial data into business intelligence to improve your bottom line, determine staff productivity benchmarks for billers, and recognize common mistakes in denial management.

Read more about factors contributing to the changes in the post-acute marketplace and what it means for manufacturers, physicians, clinicians, patients, and post-acute facilities as they anticipate the transition to the second curve.

HSG helped the physicians and executives of St. Claire Regional in Morehead, Kentucky, define their shared vision for how the group would evolve over the next decade. As well as, develop the strategic and operational priorities which refocused and accelerated the group’s evolution.

The client was a nine-hospital health system with 14 clinics serving communities in a multi-state market with very limited access to care, poor economic conditions, high unemployment, and a heavy Medicare/Medicaid/uninsured payer mix. In most of these communities, the system was the sole source of care.
Though the clinics were of substantial size (they employed 98 physicians) and comprised of multiple specialists, the physicians functioned as individuals and the practices lacked any real group culture.

Clinical integration can be expensive, but it doesn’t have to be, as this four-step road map for developing a CIN proves. Does it have to cost millions to initiate a clinical integration strategy?
Contrary to popular belief, we have clients who have generated substantial shared savings and a significant ROI over time, without massive investments. Yes, some financial capital is required for resources the CIN providers can’t bring to the table themselves. But the size of that investment can be miniscule relative to the value it produces: improved outcomes and documentation for payers.

Today’s concerns about physician compensation are the result of the changing healthcare environment. The transition to value is slow, but finally becoming a reality. Proactive hospitals want to ensure that provider incentives are properly aligned with ever-increasing value-based demands.
This report focuses on the three big questions HSG receives about adding value to physician compensation; Why are organizations redesigning their provider compensation plans? What elements and parameters must be part of successful compensation plans? How are organizations implementing compensation changes?

Revenue Cycle Management has become an even more complex issue with declining reimbursements, implementation of Electronic Health Records, evolving local carrier determinations (LCD), and payer credentialing [The emphasis on healthcare fraud, abuse and compliance has increased the importance of accuracy of data reporting and claims filing).
The efficiency of a medical practice’s billing operations has critical impact on the financial performance. In many cases, patient billings are the primary revenue source that pays staff salaries, provider compensation and overhead operating cost. Inefficiencies or inaccurate billing will contribute to operating losses.

This publication identifies and outlines the necessary characteristics of a fully-functioning clinically integrated network (CIN). What it doesn’t do is detail how hospitals and providers can participate in the value-based care environment during the development process.
One common misconception is that the CIN can’t do anything significant until it has obtained the FTC’s “clinically integrated” stamp of approval. While the network must satisfy the FTC’s definition of clinical integration before single signature contracting for FFS rates and contracts can legally start, hospitals and providers can enjoy three key benefits during the development process.

Nearly half of all Medicare beneficiaries treated in the hospital will need post-acute care services after discharge. For these patients, a stay in an inpatient rehabilitation facility, skilled nursing facility or other post-acute care setting comes between hospital and home.

With the proper process, tools, and feedback mechanisms in place, budgeting can be a valuable exercise for organizations while helping hold organizational leaders accountable. Having a proper monthly variance review process is one of the most critical factors in creating a more efficient and accurate budget. Monthly variance reporting puts parameters around what is to be expected during the upcoming budget entry process.

Managing the cost of patient care is the top strategic priority of most hospital CFOs today. As healthcare shifts to more data-driven decision making, having clear visibility into key volume, cost and profitability measures across clinical service lines is becoming increasingly important for both long-range and tactical planning activities. In turn, the cost accounting function in healthcare provider organizations is becoming an increasingly important and strategic function. This whitepaper includes five strategies for efficient and accurate cost accounting and service line analytics and keys to overcoming the associated challenges.